Ask Jean Chatzky 11 of your personal finance questions answered

How do you figure on what to pay first when it comes to loans or credit cards-highest interest or highest balance?
-Roberta S.

Hi, Roberta,
Paying off the highest interest rate first is your key to getting out of debt both fastest and cheapest. Here’s an easy way to think about it: The interest rate you’re paying is equal to the return you get on your money. So paying off a debt at 13 percent is more beneficial than paying off a debt at 10 percent. Sometimes people focus first on their lowest-balance cards because they like the psychological boost they get from retiring a card quickly. But when you look at the numbers, that’s not the best thing to do. (You can use this calculator for an easy comparison: http://unbury.me.) So here’s your game plan: Lay all your cards on the table. Pay as much as you can toward the debt with the highest interest rate while paying the minimums on the rest. Once that debt is paid off, turn to the card with the next highest interest rate, and continue until they’re all gone. Good luck!

Is it ever a good idea to close credit card accounts? Or should I leave them open and cut up the card?
-AshleyJo

Hi, AshleyJo,
The answer is, occasionally. A very important part of your credit score (it actually represents about one-third of the whole number) is what’s called your utilization ratio. That’s the percentage of credit that you have available to you, on individual cards as well as overall, that you’re actually using. For the benefit of your score, you want to keep your utilization at between 10 and 30 percent at all times. Go higher than that, and your score will start to fall. The problem is, when you close credit card accounts, you reduce the amount of credit that you have available, so the percentage that you’re actually using rises. For most people, that’s not good. So cutting up the cards (or putting them in the freezer) is actually the wiser thing to do. On the flip side, there are some people with so many cards that the enormous amount of available credit becomes a liability in their score. With so much available credit, potential lenders figure, you could go on a bender at any time. If you suspect you might be a person like this, pull your credit score along with the diagnostic report that comes with it from one of the three credit bureaus. It should tell you. Finally, if you can’t handle having credit cards and believe they’re causing you to overspend, you should close them no matter what it does to your score. Just do it gradually. Close a card. Pay down some debt. Close another. Pay down some more debt. And so on. Keep one or two for emergencies.

What is a good dollar amount or percentage to start a savings account for retirement?
-Ronie P.

Hi, Ronie,
You want to get to the point where you’re saving 10 to 15 percent of your income for retirement (10 percent if you start before age 35, 15 percent if you start after), year in and year out. That’s the goal. But that’s not where you should start. For many people trying to put away that much money immediately is like taking a big pay cut. They can’t stick with it and so they fall off the wagon as if it was an all-too-restrictive diet and go back to saving nothing. I think you’ll be much more successful if you nudge yourself higher. Start by saving 2 to 3 percent of your income. That’s the amount experts believe you can stash away without actually missing it. Do it for a few months. If you don’t notice that the money is gone, go back in and bump up your contribution by another 2 or 3 percent. If you do notice it, don’t change anything, you’ll get used to it. The next time you get a raise or cost of living increase, go back and increase your contribution again. Do this enough times until you get to the 10 or 15 percent range. A note: If this money is going into a 401(k) or other retirement account at work, it will go automatically. That’s key to your success. If it’s not going into a 401(k), arrange for automatic transfers into whatever account you’re funding. That way you can make a good decision, one time, and reap the benefits for years to come.

I recently refinanced my home to a lower rate, saving $400 a month. Am I better off applying that to principal or putting it in savings? I already max out my 401(k) and pay off my credit cards each month.
-Karen G.

Hi, Karen,
At current interest rates, neither of those options is going to earn you a lot of money on your money. So before I choose from the two on the list, I want you to think about whether you have other goals? Is it time for you to start funding a 529 college savings account for a child? Do you have a big anniversary or birthday coming up and were you planning to throw a big shindig or take a trip to celebrate? I ask these questions because I generally believe we should save more when we have the opportunity to save more. Eventually life will catch up with us and there will be a year when we’ll need to spend down these savings a bit, or when we won’t be able to make our typical retirement plan contribution. At that point, we’ll be glad we thought ahead. That said, of the two on your list you’ll get more bang for the buck by paying down principal. If you put the money into a brokerage account and invest it rather than “save” it, you could get a greater return. Then again, you could lose some of it as well.

What are the best options for student loan consolidation?
-Suanne S.

Hi, Suanne,
These days, the main benefit of student loan consolidation is administrative: one loan to deal with, one monthly payment. If you have federal loans, you’ll need to consolidate through the Federal Direct Loan Consolidation program (www.loanconsolidation.ed.gov). Your loans will be combined under one interest rate-the weighted average of your current rates, rounded up to the nearest 1/8 of a percent. That means you may actually end up paying a slightly higher rate, though you can grab a .25 percent discount by signing up for automatic payments. For private loans, too, the main benefit is pulling everything together under one roof. But if your credit score has improved a great deal since you originated the loan, you may end up with a lower interest rate. There aren’t a ton of private lenders playing the consolidation game these days, but you can find a good round-up of options athttp://www.finaid.org/loans/privateconsolidation.phtml. Finally, in January the Department of Education began offering Special Direct Consolidation Loans to borrowers who have at least one loan owned by the Department of Education and one Federal Family Education Loan owned by a commercial lender. The consolidation comes with an interest rate reduction of .25 percent.

I got a late start in creating my 401(k) and would like to get more aggressive. Unfortunately, I also have a tight budget due to paying off old debts, a car payment, a home mortgage, etc. I am contributing 8 percent of my salary at this time and am in my 30s. We get a 3.5 percent company match if we put in at least 6 percent of our salary. That being said, what is the smartest way for me to reach my retirement goals while also paying off my debt? I feel like I should pay off debt first and contribute second, but then I know I’d be missing out on free money. What do you recommend for someone like me?
-Krista F.

Hi, Krista,
I know it’s tempting to feel as if you should be paying off your debts first- sometimes those interest rates are so high it seem as if you couldn’t do better than hacking away at those credit cards. But 401(k) matching dollars are the exception. You’re making better than a 50 percent return-guaranteed-by putting that 6 percent of your salary into your plan. You have to do that. Take the other 2 percent of your salary and put it toward paying off your debts, for now. Then scour your budget for other dollars you can throw against your debts. And once you’re done, start plowing more money into that 401(k).

How do you choose a good financial planner?
-Michelle S.

Hi, Michelle,
Start by making a short list of people you might want to talk to by asking friends and colleagues for names of people they’ve worked with successfully. If that approach doesn’t yield at least a few names, go to fpanet.org (the website of the Financial Planning Association) and napfa.org (the website of the National Association of Personal Financial Advisors, which lists fee-only financial planners) and use the ZIP code locators to find a couple of people in your area. Make appointments with three or four who have at least five years’ experience. Ask them what they would do with a person in your situation and to see plans they have completed for others. You want to feel comfortable with the amount of risk they want you to take, that they are competent to deal with someone in your situation and that you can have an open, honest conversation with them. Finally, go to finra.org, click on “investors” and use the Broker Check tool to make sure there is nothing in their background that would prevent you from working with them.

What’s the best starting point for investing in the stock market?
-Michelle S.

Hi, Michelle,
The best starting point is to get an education. In my book Money Rules, Rule #63 is “If you can’t explain it, don’t buy it.” That doesn’t just go for complicated derivatives and hedge funds but also for plain old stocks. I’d like you to pick up a basic book on investing. Start with The Intelligent Investor, written by Benjamin Graham, but updated by The Wall Street Journal’s Jason Zweig. Or A Random Walk Down Wall Street, by Princeton University’s Burton Malkiel. Both are classics. And if you are chomping at the bit to get started and, for instance, have some money in a 401(k) plan that you need to put to work, I’d suggest buying a target date retirement fund (which will select a mix of investments appropriate for your retirement age) or two broad index funds (one that invests in the total stock market and another that invests in the total bond market). Index funds are significantly cheaper than managed mutual funds. Everything you don’t pay out in fees can be added to the money in your pocket.

When buying my first home, is it smarter to wait and save up 20 percent of the total cost of the home for my down payment or is it okay to have less of a down payment (5 to 10 percent)? Why?
-Patricia P.

Hi, Patricia,
The answer is, it depends. There is a lot to be said for buying a home in today’s market. Prices are still depressed in many areas, which puts the ball in the court of the buyer. Mortgage rates are as low as we’ve seen them in decades and, though it remains to be seen how long they’ll stay that way, they really have nowhere to go but up. That argues for getting in when the getting is good even if you don’t have a full 20 percent to put down. But if you don’t have that substantial a down payment, you’ll have to pay PMI (private mortgage insurance), which can cost between .05 percent and 1 percent of your total loan amount on an annual basis. If you borrow $300,000, that’s up to $3,000 a year. Once you pay down your loan to the point where you have 20 percent equity (or the value of your house appreciates enough to get you to that level), you can apply to have PMI removed.

I use my credit cards when I shop and have lately shifted my debt from higher interest cards to new cards with no interest for a limited period of time to help pay down the debt. Will this strategy impact my credit in any way?
-Kristen N.

Hi, Kristen,
There may be a few short-term dings. First, one of the factors in the cocktail that is your credit score is applying for new credit. Creditors see that action as a sign that you need money, and therefore it can take your score down a little bit. If you applied for multiple cards at once, perhaps by more than a little bit. But considering the fact that you seem to have been approved for these cards at very good interest rates, your credit score is likely pretty good to start. Over the long-term, however, paying off your debt-especially if it’s substantial-should improve your credit utilization ratio. In the cocktail of your credit score, this is a much more important piece. You want to aim to be using only 10 to 30 percent of the credit you have available to you on each card separately as well as on all of your cards combined. Make sure that you’ve paid down as much debt as possible-if not all of your revolving debt-before the interest rates on these new cards escalate.

Is there a better time of year to shop for certain products because the savings are greater? I’m most interested in clothing, cars and consumer electronics.
-Brian H.

Hi, Brian,
Great question. Yes, there is! Planning your purchases over a calendar year can actually result in pretty substantial savings, especially the sort of large purchases you’re talking about! Here are a few guidelines. February is a good time for many electronics, especially digital cameras and big screen TVs. You’ll find the best prices before the Super Bowl. Laptops and computers are an exception. They tend to be better around back-to-school season. (Note: If you want an official school discount, you may have to prove that you’re in school.) For clothing, back to school is also a good time for kids’ apparel. For adults, the best time to shop is at the end of the season, so as you’re heading into spring, you’re buying winter wear, and as you’re heading into fall, you’re buying summer gear. As for cars, the new models come out at the very beginning of the fall, so September and October tend to be the best time to cut deals on the older ones.

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